Mergers and Acquisitions-Tax impact and valuation
Upcoming SlideShare
Loading in...5
×
 

Mergers and Acquisitions-Tax impact and valuation

on

  • 21,743 views

Mergers and Acquisitions-Tax impact and valuation

Mergers and Acquisitions-Tax impact and valuation

Statistics

Views

Total Views
21,743
Views on SlideShare
21,643
Embed Views
100

Actions

Likes
4
Downloads
1,106
Comments
1

6 Embeds 100

http://www.slideshare.net 65
http://www.freewebs.com 27
http://www.e-presentations.us 3
http://www.brijj.com 2
http://www.slideee.com 2
http://www.lmodules.com 1

Accessibility

Upload Details

Uploaded via as Microsoft PowerPoint

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
  • can u please solve the example given in 27th slide..i have my exam tomorrow..reffered many books but atlast i found it in slide share..thank u so much but i am expecting a solution
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment

Mergers and Acquisitions-Tax impact and valuation Mergers and Acquisitions-Tax impact and valuation Presentation Transcript

  • Roles of Management Graduates in Mergers and Acquisitions By Prof. Augustin Amaladas M.Com.,AICWA.,PGDFM.,B.Ed . For IMIS Bhubaneshwar 28/04/08 –at 9.20 AM
  • Issues related to Mergers and Acquisitions.
    • Direct Tax implications
    • Sales tax implications
    • Foreign Direct investments
    • Method of valuation
    • Anti Trust Act
    • Financing of Mergers and Aquisitions
    • Role of Investment Bankers
    • Accounting of Mergers.
  • Recent Mergers and Acquisitions
    • HORIZONTAL MERGER
    • As Ford announced the sale of the two British iconic cars to Tata Motors Ltd.for 2.3 billion.
    • Ford acquired Jaguar for $2.5 bn in 1989 and Land Rover for $2.75 bn in 2000 but put them on the market last year after posting losses of $12.6 bn in 2006 - the heaviest in its 103-year history.
    View slide
  • The Hutch and Vodafone merger
    • Hutchison Essor
    • Indian Company
    Vodafone(Briton) A Foreign company HTIL( Whampoa group of Li-Ka Shing. Hong Kong A foreign company 67% Takes over Asim Ghosh-12% A.Singh and other companies (Minority) Essor group View slide
  • INCOME TAX RELATED ISSUES FOR AMALGAMATION
    • CONDITIONS OF AMALGAMATION UNDER INCOME TAX ACT SEC 2 (1B)
    • ALL ASSETS AND LIABILITIES OF TRANSFEROR CO. TO BE THE ASSETS OF THE TRANSFREE CO.
    • SHARE HOLDERS HOLDING NOT LESS THAN 3/4 TH IN VALUE OF SHARES OTHER THAN SHARES ALREADY HELD SHOULD BECOME SHARE HOLDERS OF AMALGAMATED COMPANY
    • EX. NO. OF SHARES OF Altd CO. 1,00,000
    • NO. OF SHARES HELD BY Bltd IN Altd IS 20,000
    • NOMINAL VALUE OF SHARE IS RS.10
    • ASSUME Altd MERGE WITH Bltd THEN 75% OF 1,00,000- 20,000 = 60,000 TO BE THE SHARE HOLDES OF B CO.
    • NOTE:SHARE HOLDERS MAY BE EQUITY OR PREFERNCE SHARE HOLDERS
  • OTHER CONDITIONS
    • THE AMALGAMATED CO. IS AN INDIAN CO.
    • EXCEPTION
    • IF SHARES OF INDIAN CO.HELD BY FOREIGN BEFORE MERGER AND SUCH FOREIGN CO. TAKEN OVER BY ANOTHER FOREIGN CO.
    • ATLEAST 25% OF THE FOREIGN CO. (BEFORE MERGER) TO BE SHARE HOLDERS OF THE NEW FOREIGN CO.
    • ? WHAT IS THE BENEFIT TO THE AMALGAMATED CO. AMALGAMATING CO.(OLD CO.)
    • NO CAPITAL GAIN ON TRANSFER ON CAPITAL ASSETS BY THE TRANSFEROR CO. UNDER SEC 47(VI) OF I.T ACT
    • ? CAN NEW CO. CARRY FORWAD AND SET OF LOSS AND DEPRECIATION
    • SEC 72 A TO BE FULFILLED
    • ACCUMULATED LOSSES REMAIN UNABSORBED FOR 3 OR MORE YEARS
    • 75% OF BOOK VALUE TO BE HELD ATLEAST FOR 2 YEARS BEFORE AMALGAMATION
    • THE AMALGAMATED CO. CONTINUES TO HOLD 3/4 TH OF BOOK VALUE ATLEAST FOR 5 YEARS
    • NEW CO. SHOULD CONTINUE FOR ANOTHER 5 YEARS
    • NEW CO. SHOULD ACHIEVE ATLEAST 50%OF INSTALLED CAPACITY BEFORE END OF 5 YEARS AND SHOULD CONTINUE FOR 5 YEARS
    • A LTD AMALGAMATES WITH B LTD AS ON 1 st April 2008
    NO CAPITAL GAIN TAX & ACCUMULATED LOSSES & UNABSORBED DEPERICIATION CAN BE CARRIED FORWARD DOES NOT ATTRACT CAPITAL GAIN FOR A BUT NO GAIN FOR B NO BENEFIT TO A & B A MERGES WITH B (A GOES OUT) SATISFIES BOTH 2(1B) & 72 A SATISFIES 2(1B) BUT DOES NOT SATISFY 72 A DOES NOT SATISFY SEC 2(1B) & 72 A PARTICULARS
    • ? If B merges with A . If B goes out of market who gains under above 3 situations
    • ? If A&B merge with c. what are the tax implication under above situations?
    • . Assume B is a loss making co. Can accumulated losses & unabsorbed depreciations be carried forward and set off by the new company?
    • ? If C is not an Indian co?
  • Tax Concession To Share Holders Of Amalgamating Co.
    • No capital gain tax provided, new co. is an Indian co.& Shareholders are acquired everything in shares
  • EXERCISE 40 70 MARKET PRICE 8 10 P/E RATIO 5 7 EPS 7,500 20,000 NO. OF SHARES 37,500 1,40,000 EAT CO. B CO. A PARTICULARS
    • Co. A is acquiring co. B. Exchanging one share for every 1.5 shares of B Ltd & P/E ratio will continue even after merger
    • ? Are they better or worse of than they were before in merger
    • ?? A is an Indian co.
    • ? A is a foreign co.
    • ? A merges with T & formed a new co. AT ltd
    • ? What are the tax planning required before & after merger
  • CONCLUSIONS
    • EXCHANGE AT EPS – NO EFFECT ON EPS AFTER MERGER
    • EXCHANGE MORE THAN EPS RATIO – COMPANY WITH LOWER EPS GAINS
    • IF LESS THAN EPS RATIO – COMPANY WITH HIGHER EPS BEFORE MERGER GAINS
  • CONCLUSION
    • IF SHARES ARE EXCHANGED BASED ON CURRENT MARKET PRICE PER SHARE , POST MARKET PRICE SHARE INCREASED AT HIGHER RATE THAN EXCHANGED BELOW THIS RATIO
    • Boot strap effect
  • CONCLUSION
    • FIRM WITH HIGHER P/E RATIO CAN ACQUIRE FIRM WITH LOWER P/E RATIO WHICH WILL INVARIABLY INCREASES MARKET VALUE AFTER MERGER
  • Conclusion
    • Fulfill section 2(1B) of Income tax act by transferor company
    • Amount to be in the form of shares
    • No cash to be received
    • Foreign Direct investments in selected sector can not exceed 74% by foreign company
    • Fulfill section 72A of the IT act so as to reap the benefit by transferee company
    • Shareholders can not transfer their holdings with in 5 years.
    • Sales tax at the rate of 8% can not be avoided.
    • Set off and carry forward of losses is possible.
    • What are the losses can be carried forward and set off? How many years?
  • Some Facts-USA Companies
    • 1897-1904-horizontal Mergers
    • Monopolistic Market structure
    • Mega merger between US Steel and Carnegie Steel.It also merged with 785 separate firms-75% of Steel production of US.
    • As a result: ???? What happened to Standard Oil?
  • Standard Oil(SO)
    • Broken in to 30 Companies. Some of them are
    • SO of New Jersey named EXXON
    • SO of New York named MOBIL
    • SO of California renamed CHEVRON
    • SO of Indiana renamed AMOCO
    • What is ANTI TRUST Act? What is known in India?
    • HCL was formed?
  • HCL
    • Hindustan Computers, Hindustan Reprographic, Hindustan Telecommunications and Indian Software Ltd.
    • In February 2008, as many as 38 cross-border deals were announced with total value of $2.80 billion, of which 27 were outbound deals with a value of $2.57 billion
    • .In March 2008 it has crossed $10 billion in investment by Indian Companies outside India.
  • Diologic
    • Meanwhile, global financial information provider Diologic in its latest report said that India-targeted M&A volumes reached $11.9 billion through 345 deals so far this year. US was the leading acquiring country with deals worth 1.6 billion dollars, followed by the UK with $904 million and Germany with USD 584 million.
  • Some Facts
    • Between 1926 and 1930- there were 4600 mergers took place
    • Result of which between 1919 and 1930 12,000 companies went out of market.
    • The second wave came to an end when stock market crashed on October 29,1929.
    • Investment Bankers played in the first two phases of mergers.
  • 1965-69 in USA
    • Management principles were applied in industries.
    • Management graduates were employed to manage conglomerate mergers.
    • There were 6000 mergers which leads to 25000 firms disappeared.
    • Investment Bankers do not finance most of these mergers
    • Finance:-????
    • Equity financing
  • EXERCISE
    • COMPANY A
    • NO. OF SHARES 2 LACS
    • MARKET VALUE PER SHARE RS.25
    • EPS RS.3.125
    • COMPANY B
    • NO. OF SHARES 1 LAC
    • MARKET VALUE RS.18.75
    • EPS RS.2.5
  • PRICE EARNING RATIO APPROACH
    • MEANING
    • COMPUTATION :
    • P/E RATIO = MP/EPS
    • EPS = EAT/NO. OF EQUITY SHARES
    • MARKET PRICE = P/E (NO. OF TIMES) * EPS
  • EXAMPLE 7.5 8 P/E RATIO(TIMES) 18,75,000 50,00,000 TOTAL MARKET VALUE (N*MPS) OR (EAT*P/E RATIO) 18.75 25 MARKET PRICE PER SHARE(MPS) 2.5 3.125 EPS 1,00,000 2,00,000 NO. OF SHARES 2,50,000 6,25,000 EAT FIRM B FIRM A PRE MERGER SITUATION
  • CONCLUSION
    • IF SHARES ARE EXCHANGED BASED ON CURRENT MARKET PRICE PER SHARE , POST MARKET PRICE SHARE INCREASED AT HIGHER RATE THAN EXCHANGED BELOW THIS RATIO
    • Boot strap effect
    • MARKET VALUE AFTER MERGER = MARKET VALUE BEFORE MERGER = 68,75,000
    • NET GAIN = 15,00,000
    • ? IF EXCHANGE RATIO IS 2.5:1 WHO GAINS WHO LOSES
    • ? IF EXCHANGE RATIO IS 1:1 WHO GAINS WHO LOSES
    • ? HOW TO CALCULATE TOLERABLE SHARE EXCHANGE RATIO
  • DETERMINATION OF TOLERABLE SHARE EXCHANGE RATIO 75,00,000 10,00,000 TOTAL MV LESS: MINIMUM TO BE GIVEN TO B 1,00,000 NO. OF SHARES OF A TO A CO. SHARE HOLDERS 65,00,000 NET BENEFIT TO A 10,00,000/65 = 15,385 SHARES NO. OF EQUTY SHARES TO BE ISSUED BASED ON DESIRED MARKET PRICE 50,000/15385 = 3.25 SHARES OF FIRM B, 1 SHARE IN FIRM A 1:3.25 TOLERANCE SHARE EXCHANGE RATIO 65 PER SHARE DESIRED POST MERGER MPS
  • CONCLUSION
    • FIRM WITH HIGHER P/E RATIO CAN ACQUIRE FIRM WITH LOWER P/E RATIO WHICH WILL INVARIABLY INCREASES MARKET VALUE AFTER MERGER
  • 7.5 8 P/E RATIO (ASSUMED TO BE THE SAME) 21.825 3.125*8=25 MPS 65,47,500 70,00,000 TOTAL MARKET VALUE 8,75,000/3,00,000=2.91/ 8.75/2.8=3.125 EPS 2,00,000+1,00,000=3,00,000 2.8 lakhs NO. OF SHARES 8,75,000 6.25+2.5=8.75 EAT(COMBINED FIRM) 1 : 1 2.5:3.125=.8 EXCHANE RATIO/ SWAP RATIO (ASSUMING) SITUATION 2 SITUATION 1 (BASED ON CURRENT MARKET PRICE POST MERGER
  • ACCOUNTING FOR AMALGAMATION
    • POOLING INTEREST METHOD
    • CONDITIONS AS PER AS 14:
    • ALL ASSETS AND LIABILITIES OF TRANSFEROR CO. TO BE THE ASSETS OF THE TRANSFREE CO.
    • AT LEAST 90% OF F.V OF EQUITY SHARE HOLDERS SHOULD BE SHAREHOLDERS OF NEW CO.
    • PURCHACE CONSIDERATION TO BE SETTLED BY THE NEW CO.
    • THE BUSINESS OF NEW CO. SHOULD CONTINUE
    • NO ADJUSTMENT IS INTENDED TO BE MADE TO BOOK VALUE OF ASSETS AND LIABILITIES OF TRANSFEROR CO.
  • Life Education
    • Abraham Lincolin
  • Thank You All.
  • Pricing of Capital issues
    • Step-I
    • Total assets
    • Less: Preference Capital
    • Secured and unsecured borrowings
        • Current liabilities
        • Contingent liabilities
        • ---------------------------------------------------
        • A.Net Worth
        • ---------------------------------------------------
  • Method II(Liability Approach)
    • Equity Share capital
    • Add: Free reserves
    • -------------------------------
    • Less:-
    • Contingent Liabilities
    • ---------------------------------------------
    • Net worth
    • --------------------------------------------
  • 2.Profit Earning Capacity Value-PECV
    • Weighted Adjusted Average Profit before Tax
    • Less: Provision for Tax at %
    • ------------------------------------------------
    • Weighted average profit after Tax
    • Less : Preference dividend
    • ----------------------------------------------
    • Net profit after Tax and dividend
    • Number of Equity shares including Fresh and bonus shares
    • -------------------------------------------------------------------------
    • EPS
    • PECV= Capitalisation of Profit at 15%/12%/10%/8% respectively
    • = Net Profit After tax and dividend*100/15
  • 3.Fair value
    • (Net Asset value +Profit Earning Capacity Value)/2
  • 4.Average Market Price
    • Year I High Low Average
    • Year II
    • Year (Current Year)
    • 4. Monthwise: 1
            • 2
            • 3
            • 4 etc for 12 months
            • (Average market price for the three years)
  • 5. Capitalisation rate
    • If MV not more than 20% of FV-15%
    • If MV more than 20%-50% -12%
    • Between 51-75 - 10%
    • Above 75% - 8%
  • PE- Multiple
    • Average P/E ratio of related companies are
    • Considered to discount